Nigeria Oil Gas Sector Report A PDF

Nigeria Oil & Gas
Nigeria | Energy | Oil & Gas 17 November 2014

Equities
The Long Journey
angus.mcphail@fcmbuk.com , +44 20 7220 1043
CSL Stockbrokers is a division of FCMB (UK) Limited which is authorised and regulated by the Financial Services
Authority (FSA) in the United Kingdom.
1 Oil & Gas sector Equities
Cover Picture:
Source: The Telegraph 25th January 2010, ‘A woman walks along an oil
pipeline near Shell's Utorogu flow station in Warri’
Page 1
CSL Stockbrokers is a division of FCMB (UK) Limited which is authorised and regulated by the Prudential Regulation
Authority (PRA) and regulated by the Financial Conduct Authority (FCA) in the United Kingdom.
Table of Contents
Executive summary 3
Introduction 5
Part 1 - Nigeria
Niger Delta Petroleum Geology 8
Capex 16
Transaction Activity 22
Oil Price Outlook 24
Nigerian Petroleum History, Production and

Consumption 28
Indigenisation continues 33
Why Nigeria is attractive 35
Key Risks 38
Our Key Criteria for investment 39
Our valuation methodology 40
Our assumptions 41
Part 2 – The Companies
Afren 43
CAMAC Energy 64
Eland Oil & Gas 87
Mart Resources 96
Shoreline Natural Resources 106
Niger Delta Exploration & Production 118
Lekoil 137
Seven Energy 148
Mid Western Oil & Gas 158
Seplat 160
Oando Energy Resources 178
Oando plc 185
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Executive summary
In “The Long Journey” we are initiating coverage on nine Nigerian

and Nigeria-focused E&P companies. Our coverage is comprised of
eight listed companies and four not currently listed. The unlisted
companies that we have selected in this report are those which we
feel are best-equipped to succeed. This is not a closed group and we
may add a few more companies in the future.
Nigeria, and this sub-sector of companies, have been overlooked for the
past few years as exploration success first in neighbouring West African
nations and then more recently in East Africa have caught the spotlight.
However, we think a number of important events may draw attention back
to the Niger Delta.
· The success of Seplat’s dual listing in London and Lagos this year
has set a precedent for other unlisted companies in Nigeria to
consider raising equity, with many looking after Nigerian elections
in February 2015 as a possible entry point. The current volatility
in the oil price may slow down this process but we see the former
as a short term phenomena.
· We see a switch away from further Pioneer tax allowances on

marginal fields being granted towards full operatorships being
granted instead. An important catalyst to drive this forward will be
lower oil prices and the need to maintain capex levels and
indigenious production should oil prices remain low for a
prelonged period in 2015. Capex levels by IOCs are set to fall by
4% to US$169bn globally with continued divestments in Nigeria
mainly offshore. Currently there is an estimated US$11bn and
2.1mmboe (2P) for sale by the IOCs in Nigeria.
· M&A will be a feature in 2015 with E&Ps applying the philospohy

that it is ‘cheaper to buy than build’. We view Afren as a prime
target given its low valuation which reflects a substantial corporate
governance discount.
Share price performance of our Nigerian E&P coverage companies has

been poor (-24% YTD) and has been impacted negatively due mainly by
lower oil prices since Q3 2014 which we consider to be a short term
phenomenon with OPEC likely to cut production in early 2015 in response
to continued price weakness. Demand growth continues to look positive,
IMF growth forecasts confirm this and supply will be reigned in through the
effect of the marginal cost curve. In effect lower oil prices will sow the
seeds of their own solution with prices recovering and equity valuations
rising again in response. The current basket of listed Nigerian players
offers a number of interesting value plays both in terms of core NAV and
core RENAV values.
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Nigeria E&P company valuations plus selected regional comparables

AFN CAK ELA LEK MMT OER OANDO SPL Average
US$M unless stated £ US$ £ £ C$ C$ N N Nigeria
Share price (LC) 0.73 0.45 0.86 0.38 0.85 1.67 21.93 458
Share price (YTD) % -57% -23% -17% -37% -27% -2% -22% -10% -24%
Market cap (LC) 807.4 567.6 129.33 137 303 1328 199227 253947
EV (LC) 1411 624.5 99.14 92 684.55 2235 396698 253947
2P reserves (mmboe) 268 18.177 24 0 16.9 447 427 225

2P + 2C reserves (mmboe) 731 - 60 253 23.00 766 731 337
EV/2P (US$/boe) 8.3 34.4 6.6 - 35.53 4.38 5.43 6.59 14.45
EV/2P+2C (US$/boe) 3.0 - 2.6 0.57 26.11 2.56 3.17 4.40 6.06
EV/Production 2014e 163 3 257 - 235 135 160 148 157

EV/Production 2015e 99 7 30 - 87 137 162 68 84.22
Core NAV (LC) 1.35 0.43 2.72 0.09 1.18 0.66 18.34 808
Total NAV (LC) 2.90 2.94 2.86 1.48 1.63 1.50 18.34 815
Price/Core NAV (x) 0.54 1.05 0.31 4.07 0.72 2.52 1.20 0.57 1.37
Price/NAV (x) 0.25 0.15 0.30 0.26 0.52 1.11 1.20 0.56 0.54
View BUY BUY BUY BUY BUY HOLD HOLD BUY
As one CEO recently put it, the risks in Nigeria are not in the sub-surface
but are all on the surface, and while the country does indeed have its own
particular operational challenges it is not nearly as difficult for our coverage
companies to operate in the Niger Delta as it has been for Royal Dutch
Shell and the other IOCs.
Nigeria is arguably one of the most geologically attractive hydrocarbon

provinces in the world. More than a thousand oil fields have been
discovered yet fewer than 350 have been developed. If Nigeria had the
same Reserves/Production ratio as Russia, Nigeria should be producing
around 5mm b/d rather than the 1.9mm b/d it currently does.
We would argue that the upside for Nigeria is substantial. Production

growth can be delivered by encouraging the IOCs to move out of the Delta
and to use their balance sheets and technology in the Deepwater. In their
place the indigenous E&P companies will grow onshore and shallow water
oil & gas production with their lower cost bases and better operational
skills. Infrastructure, fiscal certainty, access to funding and stakeholder
relations are key to realising growth and are all on an improving trend.
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Introduction
This report is divided into two sections. Part One offers an outline of Niger
Delta geology, why we think Nigeria is attractive and our views on
valuation and key investment criteria. Part Two is dedicated to the 11
companies on which we are initiating coverage.
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Part 1 - Nigeria
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Niger Delta Petroleum Geology

Geological map of the Niger Delta and surroundings
Source: TJA Reijers
Page 8
Niger Delta hydrocarbon province
Source: USGS
The Niger is a large and prolific oil and gas prone delta system of A large and prolific oil and gas prone
approximately 300,000 km 2 that has pro-graded progressively southwards delta system
into the Gulf of Guinea, depositing up to 10 km of sediment thickness from
Eocene to recent times.
The onshore part of the basin is divided into several different depositional
fairways that are characterised by slightly different geology: Northern
Depo-belt, Greater Ughelli Depo-belt, Central Swamp Depo-belt and
Coastal Swamp Depo-belt. In the deepwater, the sediments divide into an
eastern and western lobe.
There are three main stratigraphic intervals recognised:
1. Marine pro-delta mudstones and turbidites (Akata Formation)

2. Deltaic and fluvio-deltaic mudstones and sandstones (Agbada
Formation)
3. Continental alluvial and upper coastal plan sandstones (Benin
Formation)
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Principal sedimentary facies in the Niger Delta region
Source: USGS
Source: USGS
The Niger Delta is a self-contained petroleum system with source rocks

described at discrete levels: the Eocene, the Oligocene and Lower
Miocene. The Paleocene and the upper Cretaceous may also constitute
potential source rocks, but their contribution to the Niger Delta oils is not
proven. Onshore, the Delta is divided into five extensional depobelts:
Northern Delta, Greater Ughelli, Central Swamp, Coastal Swamp and
Shallow Offshore depobelts. Sediments contained in these depobelts
become progressively younger seaward. In deep water, the Delta is
divided into three structural belts: Inner Thrust Belt, Fold Belt and Outer
Thrust Belt, developed in a compressional regime. Some nine plays have
been penetrated in the Niger Delta. Offshore, the plays are developed in
association with conventional delta shoreface and shallow marine
reservoirs, while in the deepwater the plays are developed in turbidite
sands (figure 4). Each well penetrates no more than two or three
productive plays, principally because of the progradational nature in the
evolution of the Delta. In the deep water however, the plays are vertically
stacked, with several plays capable of being reached in each well.
Recognition of this play distribution also determines, to a large extent, the
target objective plays in each structural belt. Thus, in the Northern Delta
depobelt the primary objective play is the Middle Eocene, while in the
Coastal Swamp depobelt the primary play is the Middle Miocene. In each
case, the younger section is developed in predominantly continental facies
that lack seals and traps, and may have been shielded from charge by
regional seals below.
The Middle Miocene play is one of the Niger delta’s most prolific, and is
developed in the North and Central belts of the Coastal Swamp depobelt
and in the eastern part of the Shallow Offshore depobelt. To date, 331
exploration wells have been drilled to test the Middle Miocene as primary
or secondary objective, with a success rate of 67%. The level of full
penetration onshore is only about 18%, an indication of remaining potential
yet to be explored in the deep play. In contrast, in the deep water, the level
of penetration is almost always full. Here, the Middle Miocene has been
penetrated in almost all the wells, as it is often targeted as part of the
vertical stack of plays. While the Middle Miocene is primarily restricted to
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the Coastal Swamp depobelt, it also is highly productive in the eastern part
of the Shallow Offshore depobelt. This part of the Shallow Offshore is
adjacent to a very narrow shelf area further updip, and this may have
created favorable conditions for development of shelf collapse features
feeding reservoirs into a slope environment down dip. Also, this is a zone
of development of complex duplex thrust structures bringing these
reservoirs to shallower levels. Other departures from the norm may exist
elsewhere in the older depobelts.
Reservoir presence is usually not an issue in the Niger Delta’s Middle

Miocene, where onshore reservoir facies are developed in shelf sands
and, in deep water, in turbiditic and slope facies sands. Traps of various
types onshore and offshore are ubiquitous. Onshore, most of the traps are
structural (growth fault related rollover anticlines), and the deep water,
where the traps almost always have a stratigraphic component in
association with compressive structures. Seal development is represented
by top seal and fault seal components, depending on the structural type
and the depth of occurrence.
Examination of data for the Niger Delta shows that well failure is attributed
to the following factors:
1) Fault seal failure. This is the most common type of failure in the
Niger Delta.
2) Lack of a valid trap, which may be due to several factors: Poor
trap definition, especially if drilled on 2D seismic.
3) Well positioned off structure.
4) Change in structural culmination with depth (for wells drilled
before deviation drilling).
5) Structural complexity and inability to reach target with a vertical
well.
6) Absence of stratigraphic pinch-out of the target.
7) Poor reservoir development – more prevalent in the deep water
and in deeper parts of the onshore.
8) Migration by-pass.
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Principal structural zones in the Niger Delta region
Source: AAPG
Known trap types comprise structural, stratigraphic and combination traps.
Most fields discovered to date (i.e. those within the onshore and in the
shallow water offshore) involve extensional tectonics and 'down-to-the-
basin' faulting; most important are 'roll-over' structures into growth faults
and simple fault traps. The primary seals are mudstones, inter-bedded
with the sands (providing both overlying and cross-fault seals).
Structural complexity increases into the deeper water due to increasing

instability related to overpressure. Here, gravity-driven tectonics produce
active mud diapirism, large folds and thrust-faulted structures: Shale
diapirs affect sand deposition (ponding), provide lateral seal potential and
produce structures in younger sediments; thrusts verge towards the basin
and produce elongate four-way dip and faulted structures with significant
vertical relief. Updip leakage of hydrocarbons is high risk, especially if
thrusts are currently active or four-way dip closure is not present.
Reservoirs range in age from Eocene to Pliocene but petroleum is mainly Reservoirs range in age from Eocene
produced from sandstone and unconsolidated sands of the Agbada to Pliocene
Formation, in onshore and shallow water areas.
Individual sands in the Delta Top environment range from 45m (composite
stacked channel sands) down to <15m thickness (various depositional
settings). Lateral variation in thickness can be significant and is controlled
by growth faulting.
As the sediments are very young, reservoir quality is largely controlled by Very high porosities and
sand body type, rather than depth of burial. Very high porosities and permeabilities are common
permeabilities are common (typically 25-35% porosity and up to several
Darcies permeability).
The outer portion of the Delta complex contains deepwater sand bodies
(turbidite channels and fans). Reservoir presence is more sporadic than
in other large deltas, apparently because much of the sand within the
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Niger-Benue system is deposited and retained on the delta top. Deep-

water reservoir quality variation is less well understood due to the lower
number of wells drilled and fields discovered.
The source rocks for both the oils and gas are not tied down categorically
– prodelta mudstones of the Akata and Lower Agbada Fms are assumed
to be the major contributors. Petroleum generation may have begun as
early as the Eocene, and continues to the present day. Geothermal
gradients are currently very low (c.20oC/km on average), which restricts
oil and gas generation to greater depths than is typical.
The reservoir quality of the sandstones is good to very good with porosities Good to Very Good quality reservoirs
often above 20% and typical hydrocarbon saturations from 70% to 90%.
Permeabilities can range from several hundred to thousands of mD.
Niger Delta – Field Sizes

The field size distributions below are representative of the onshore and
shallow water areas. The nature and similarities of the trap styles in these
areas means that there is relatively little variation in field size distribution.
Onshore and shallow water field sizes average ~90mmbbls though two
thirds are <50mmbbls in size. Most fields have stacked reservoir sands,
column heights are usually low (<20m) and gas caps are common.
Successful gas handling is crucial as gas flaring is being phased out.
Field size distribution in the Niger Delta region
Source: Richmond Energy Partners
The four deep-water developments to date are in the 500-1000mmbbls

reserve range but the median discovery size is closer to 100mmbbls.
Niger Delta – Future potential

The statistics of exploration success in the onshore and coastal offshore
(<200m WD) show a 'creaming curve' indicative of a well-explored,
maturing basin where reasonable sized discoveries continue to be made.
There is a big opportunity to bring known onshore fields and discoveries
into production due to the lack of investment in recent years.
A high proportion of current interest and activity is focused on the

requirement for traditional operators, in the onshore and shallow water
offshore areas, to dilute equity in licences where activity has stalled or
discoveries are not being developed – Nigerian companies must take up
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these stakes and this has led to Nigerian entrepreneurs seeking joint
ventures and alliances with experienced operators. These opportunities
have mainly attracted small and mid-cap companies, many with existing
interests in the region and good relationships in the country.
In 2010 the USGS estimated that future discoveries of conventional oil and 27bn boe of future discoveries,
gas in the Niger Delta would total approximately 27bn boe (mean case) of according to the USGS.....
which 60% would be crude oil and natural gas liquids, with the remainder
made up of associated gas and non-associated gas. 89% of these yet-to-
find technically recoverable resources were predicted to reside in
reservoirs of the Akata Formation.
In 2005 Total (N/R) published an estimate for the future yet to be

discovered resources in Nigeria. Total indicated that the highest remaining
liquids potential to be in the onshore area. The most mature area with the
least liquids potential lies in the shallow waters offshore.
Estimated Yet to Find in Nigeria

Yet to Find Oil Yet to Find Gas Total Yet to Find
bn bbls bn boe bn boe
Onshore 10 6 16
Shallow Water 2 3 5 ....Total estimates 30bn boe yet-to-
Deep Water 6 3 9 find, with more than half onshore.
Source: Total
Exploration in the deep-water areas has been much less extensive than
that in shallow water. However, success has been modest compared to
other deep-water provinces like Angola and the Gulf of Mexico. Trap
integrity in the toe thrust belt of deep-water structures seems to be a
problem, so success rates were low and the discoveries that have been
made are generally low volume and often gas phased.
Of the Niger Delta’s 1,300 exploration wells, 822 have been drilled
onshore, 412 in the shallow offshore and 82 in the deepwater.
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Niger Delta Stucture and play sub division
Source: AAPG
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Capex
We estimate that to date over US$28bn has been spent on exploration
wells alone in Nigeria onshore and offshore since activity began in the mid
1960s’. Our metrics behind this assumption are that on average it costs
US$100m per deep water well, US$20m for a shallow well and a minimum
of $15m onshore. These prices reflect today’s prices rather than historic
ones and do not factor in infrastructure requirements, which in deepwater
are significant, runing into billions of dollars.
Capex Offshore Nigeria Deepwater Projects (2005 to date)

No of wells Estimated cost per well US$ US$(m)
Onshore 822 15 12,330
Shallow offshore 412 20 8,240
Deepwater 82 100 8,200
Total 28,770
Source: CSL Estimates
In the deepwater since Shell first commenced production at the giant

Bonga field in November 2005, we estimate over US$27bn has been spent
(exploration, development and production capex) on these projects alone,
with a similar amount pending Final Investment Decision (FID). Our
estimates are based on opex estimates of US$30/bbl, and/or US$7/bbl
capex for full field development which appears to tie in well with reported
numbers by companies.
Capex Offshore Nigeria Deepwater Projects (2005 to date)

Gross production Estimated Reserves Estimated capex
Project Operator Year onstream Oil (kbpd) Gas (mcfpd) (mmboe) US$(bn)
Bonga SHELL Nov-05 200 150 600 3.6
Erha & Erha North EXXON 2006 150 - 500 3.5
Agbami STAR DEEP WATER Jul-08 250 - 900-1500 6.3-10.5
Akpo TOTAL Mar-09 175 320 620 6.2
Usan TOTAL 2011 180 3 500 4
Bosi EXXON 2013 135 - 500 4.1
Bonga NW SHELL Aug-14 40 - >500 1.9
Bonga SW SHELL FID 2014 110 - 500 12
Bonga East SHELL FID pending - - >500 4
Bonga NE SHELL FID pending - - >500 1.9
Zabazaba/Etan ENI 2016 (FID due) 40 - >500 3.5
Bolia Chota SHELL FID due - - 1tcf
Nsiko & Uge CHEVRON FID due - - 250 1.8
Egina TOTAL 2017 200 - 550 4.2
TOTAL 6920 50.7
Source: CSL estimates
Total production from existing deepwater projects is around 1.1mmbpd,

or 60% of current Nigerian oil and gas production with the remainder
coming from offshore and marginal fields.
The outlook for Nigeria’s oil and gas production is linked to future capex
levels and the ability of the new indigenous players to access capital based
on oil prices
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Split of Nigerian Oil production by source (1995 -2025E)
Source: Oando
Several deepwater projects have since been deferred FID until 2014 or
postponed indefinitely on account of the uncertainty over the prevailing
fiscal terms or passage of the PIB. Projects affected by the non-passage
of the PIB include Shell's Bonga SW, Bonga NW, Bonga East, Total's
Egina project, ExxonMobil's Bosi Chota project, ENI’s Zabazaba/Etan field
and Chevron and Exxon Mobil’s joint Nsiko/Uge development.
We can see two common themes here amongst the deepwater projects
namely that they tend to be all oil-based with the only exception being
Royal Dutch Shell’s Bolia Chota field which is estimated to contain over
1Tcf of gas reserves. Also field sizes tend to be over 500mmboe, with size
and scale justfiying the field development economics. Nigeria remains
attractive when compared to other deepwater projects globally, given the
limitations of resource access and exploration success. Nigeria offers
billion barrel projects as against the sub 100 million barrel projects on offer
elsewhere. This is pitched against the prevailing trend that it is getting
harder to find oil globally with the marginal cost of exploration development
and production all rising. Clearly oil companies know where the risk/reward
balance lies here, with the volumes to value ratio being compelling enough
to justify allocating continued capex towards Nigerian deepwater projects.
If we examine analysis by Chevron, exploration in West Africa excluding

Nigeria, post the Jubilee discovery, reveals that over US$5bn has been
spent on deepwater exploration wells to date since then across 50 wells
(or US$100m per well), with a success rate of around 60% being higher
than the global average of 10% for wildcat frontier wells. This success rate
sounds initially encouraging; however the commercial size of the
discoveries made has been falling steadily over time from billion barrel
Jubilee type discoveries to an average of 100mmboe which immediately
challenges the economics of any discovery made. Importantly this
excludes the two recent significant discoveries made by Cairn Energy
(N/R) in offshore Senegal.
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Post Jubilee Deepwater well discoveries by size
Source: Chevron (Oil Council Presentation Paris, June 2014)
Nigeria’s exploration success rate in the deepwater is roughly in line with

this West African average, at 60%. The key exploration risk, as we have
mentioned previously in our geology section, is establishing a working trap
mechanism.
Despite the uncertainties of the PIB there is evidence of IOCs allocating

capex and pressing on with development regardless of the fiscal
uncertainty. For example Royal Dutch Shell announced a tender last May
for the US$12bn Bonga SW FPSO project, which will be the largest FPSO
on the world. Although no specific reserve figures are being disclosed, we
know that the first discovery at Bonga was in 1996 with first oil production
in 2005 and has to date produced 450mmboe, or about one third of its
existing reserve estimates. Therefore to justify a standalone FPSO
development like Bonga SW would require over 500mmboe all else being
equal. An FPSO-style development offers the advantage of lower unit
costs of production versus a traditional semi-submersible rig as well as the
flexibility to stop production and move the facility away from weather-
related disruptions. Royal Dutch Shell also recently confirmed plans to drill
eight more wells in the Bonga SW field which will add 40kboepd to the
existing FPSO development which has a maximum capacity of 200kbpd
and 150mscfpd, through four oil-producing and four water injection wells.
Funding behind these projects is being partly finnaced through Shell’s
active rolling divestment programme onshore where it is selling four blocks
estimated to be worth over US$6bn in total according to our estimates.
Total’s Egina project has also been delayed because of tough local
content provisions. Invitations to tender for the large floating production
storage and offloading (FPSO) vessels were released in July 2014, six
months behind schedule, to several South Korean, European, and
Chinese bidders. Nigeria's local content provision, signed into law last year
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in April, stipulates that a significant amount of the fabrication of the vessels

topsides must be carried out in the country. Nigerian shipyards, are
however not able to construct an FPSO's 34,000-tonne deck owing to a
lack of capacity and capabilities. In order to meet these local content
requirements, the bidders now need to upgrade Nigerian facilities, which
will increase the cost by around US$200 million. First oil production was
originally scheduled for end-2012 but has now been pushed back to 2014/
15.
Nigeria has the scope in terms of mega oil projects offshore to continue to
attract international majors rather like UK North Sea did in the 1970s and
80s. In the UK, high tax rates coupled with a lack of consultation with
industry by successive governments via the Treasury led to declining
investment in marginal fields which are now the staple of the core
producing areas in the UK North Sea. High tax rates can therefore be a
double edged sword, providing governments with revenues to prop up
domestic budgets, whilst in the long run deterring investment and longer
term revenue generation. It is clear that although Nigeria’s deepwater
projects may face delays owing to the uncertainty created by the PIB they
still rank highly versus other international projects given the size of the
reserves on offer, as well as the scope for tie-in wells through additional
exploration opportunities.
Marginal Field Capex
The definition of a marginal field is interchangeable and is dependent on

a number of technical, commercial and regulatory factors, including
reservoir characteristics, lack of existing infrastructure, and prohibitively
high development costs. The definition can also be time-specific, for
example in the deepwater West Africa a field size of less than 450 million
barrel field is now defined as marginal but this is only due to the current
high costs of development and could change if oil prices increased.
Generally, a marginal field is defined as one in which economics do not

currently meet acceptable rates of return. A slight variation to this definition
is that a marginal field does not fulfill the economic criteria necessary to
justify commercial development using ‘conventional’ development
scenarios. Interestingly, there is little to indicate that marginality is a
question of size. Malaysia’s biggest oilfield, the Petronas-operated Cendor
field is marginal, according to the government’s definition of ‘20-30%
recovery factor and less than 30million barrels of oil equivalent’. In Texas,
marginal fields (stripper wells) range from a 10 barrel per day oil wells to
a 50 mcf per day gas well. In the UK in an effort to stimulate development
the government provides up to £800m on Ultra Heavy oil fields, defined as
those with oil at 18degrees API or higher. Other incentives include the
Brown Field Allowance of £250m for incremental investments in mature,
offshore fields whose expected capital costs exceed £60/tonne. In Nigeria
the main tool being used is the Pioneer Tax regime which allows producers
to pay no tax for a period of five years.
In Nigeria the government classifies marginal fields using several criteria,

including fields with small recoverable reserves of less than 20mmbbls,
heavy oil or high-water cut requiring expensive processing, unappraised
discoveries, fields with high gas and low oil reserves, and fields which
have remained non-producing for over 10 years.
Nigeria currently has an estimated 577 marginal oil and gas fields
containing an estimated 2.3bnboe (STOIP). To date only 25 of these fields
have been allocated to indigenious operators with only around 8-9 of these
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fields actually producing. Around half of the marginal fields have reserves
of 5.4mmboe. Within Nigeria’s total oil and gas production current
marginal field production only accounts for 2-3% with the lion’s share
coming from deepwater offshore projects like Bonga (200-240kboepd) and
offshore shallow projects. The slow pace of development can be attributed
to a lack of finance capital, technology, and manpower. The perceived
risks of operating in the Niger Delta onshore/shallow water do not appear
to be subsurface but on the surface and include the risk of theft or
disruption to pipelines and this is something indigenious players are better
placed to deal with relative to the IOCs through local communitity
engagement efforts aimed at building trust.
Indigenous marginal players have been quick to apply new technology

such as directional well drilling to their assets in order to improve ultimate
recovery rates and returns. The costs of such wells in onshore/shallow
water Nigeria is US$20-23m depending on depth and relative complexity.
If we assume a 40% recovery factor and US$20m per well on the
estimated 2.3bnboe STOIP estimates this equates to a further US$1.8bn
being required to develop existing marginal field assets alone. This is
before infrastructure requirements.
Total Estimated Capex in Nigerian Oil & Gas Sector

US$(bn) Assumption
Capex required to maintain 2mmbpd 387 US$10/bbl OPEX and capex
Additional investment to achieve 4mmbod 195 US$10/bbl OPEX and capex
Pipelines (Oil & Gas) 15 US$1m/km
Gas based electricity 67.5 40-45GW required
Total 664.5
Some market estimates have predicted the total capex requirement for the
whole Nigerian oil and gas industry to be US$165bn over the next five
years. We view this as conservative since even assuming the lowest
capex and opex expenditure rate of US$10/bbl just to developed and
produce existing reserves this could require US$387bn, with an additional
US$195bn required to increase production to 4mmbpd.This is before
infrastructure requirements including pipelines, most of which require
replacing given their existing corrosion and age.
On the gas side we have already estimated that the power sector requires
US$60-68bn, to meet projected new capacity requirements of 40-45GW
within ten years. Gas is well placed to match this primary energy
requirement since it’s the cheapest source of energy and readily available
in Nigeria. In total therefore US$664bn could be required to develop
Nigeria’s oil and gas industry to fully harness its potential.
Further changes are therefore needed to increase the pace of

development within the Nigerian indigenious oil industry to encourage
investment. We do see the impetus for a change in the status quo of
NPDC/NNPC operatorship status being dropped in favour of allowing
indigenous players the right to own and operate fields themselves. This
would encourage further investment without the need to carry the NOC
through to first oil thus improving the economics of marginal projects. We
also see a trade-off here with the Nigerian government not granting any
further pioneer tax status if the operatorship is to be awarded. For
companies that have already achieved pioneer status the probability of
achieving the operatorship is therefore unlikely now in our opinion given
this backdrop.
Page 20
The largest IOCs operating in Nigerian deepwater recently reported Q3

2014 numbers and although none have stated their capex intentions
clearly going into 2015 they all have excess cash on their balance sheets
which provide a buffer against lower oil prices. Pressure to increase
profitability but not at the expense of future growth is the main strategy
being followed by IOCs. Increasing divestments in Nigerian
onshore/shallow water remains thematic however with the objective of
allocating capital into higher return/lower risk projects globally. We
forecast a slight decline in capex by 4% y/y in 2015 across the IOC’s to
US$180bn which is partly a function of anticipated oil price weakness in
H1 2015 but also increasing capital discipline in response to cost inflation
in the oil services industry.
Royal Dutch Shell’s post FID breakeven on new projects is US$75/bbl

which appears to be higher relative to Bonga with operating costs of
US$30/bbl (pre tax) and US$55/bbl (post tax). This would suggest Shell
will remain committed to the development of Bonga and its deepwater
Nigerian portfolio, and will continue its process of de-risking itself from
onshore/marginal assets like Exxon, TOTAL, Chevron and ENI are all
doing.
The majority of IOCs test their new oil projects between a range of
US$80/bbl to US$100/bbl. Total test their new, large, long-term projects at
US$100/bbl under a ROCE target of 15%, which suggests confidence that
oil prices will rebound in the long term. Nigerian deepwater projects stack
up well based on these metrics with investment set to continue given the
relatively low operating costs, high reserves and low exploration risk
attached to them.
Total IOC Capex (2009 – 2017E)

US$(bn) 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e
Royal Dutch Shell 29 24 24 30 38 35 33 33 33
BP 21 18 18 23 25 23 22 22 22
TOTAL 12 14 25 24 28 26 25 25 25
ENI 17 17 17 17 16 16 16 16 16
Exxon Mobil 27 32 37 40 43 40 37 37 37
Chevron 18 19 25 30 38 40 36 36 36
Total 123 124 145 164 187 180 169 169 169
% YoY 1% 16% 13% 14% -4% -6% 0% 0%
Source: CSL estimates, Companies
Page 21
Transaction Activity
To date 2014 has been a very active year with over US$5.8bn of
transactions being completed amounting to over 1.1bnboe in reserves
being exchanged. The highlight of 2014 in terms of transactions being
completed was the US$1.65bn Oando/Conoco deal which took 12 months
to obtain government approval. This was the largest deal in terms of size
for 2014 and marked an important milestone in that an indigenous
company seeking growth through acquisitions could achieve it. The old
adage that it is ‘cheaper to buy than build’ applies globally to the oil
industry with companies keen to leverage on higher production and access
to 2C resources that can be readily converted into 2P producing reserves.
Nigerian M&A Transactions 2014
Source: Oando Energy
Inorganic growth through acquisitions is the fastest route to building an oil

business with Nigerian indigenious players typically leveraging on their 2P
assets initially to obtain debt finance then matching this debt with equity in
capital markets through IPOs and/or private equity placements.
The average price for onshore Nigerian oil assets has remained at
US$4/boe for 2P assets and US$1.5/boe for 2P and 2C assets. Offshore
values increase in line with higher size of reserves and resources,
however there has been less activity here relative to onshore assets.
Higher activity levels onshore can be attributed to the continuing strategy

by IOCs and in particular Royal Dutch Shell (N/R) to divest smaller less
economically viable fields. Allied to this is the fact that by moving these
marginal assets to smaller indigenous producers their activity levels and
ultimate investment levels could increase. In that sense everyone benefits
including the government through royalties and corporate taxes.
Page 22
List of Transactions in Nigerian Oil

EV 2P 2C EV/2P EV/2P+2C Net prod. EV/Prod
Buyer Assets Equity interest Vendor Completed US$m mmboe mmboe US$/boe US$/boe Boepd US$'000/boe
Offshore
Oando OML 131 5% Medal Oil Pending 5 30 0.17 n/a
EER/FHN OML 113 18% Chevron Jul-13 40 35 1.14 n/a
BTG/Helios OML 127 & 130 Various Petrobras Jun-13 1,525 92 16.67 27,500 55
Sinopec OML138 20% Total Pending 2,460 100 24.60 24,000 103
CNOOC OML 130 45% TOTAL, SAPETRO, Petrobras Jan-06 5,040 620 500 8.13 4.50
Onshore
Mid Western/Sun Trust OML 16 45% Shell Pending 1000 30,000 33
Eland OML 17 40% Allgrace Energy Pending 25 50 0.50
Lekoil OML 11 40% Green Energy Pending 28 42 0.67
Quantum OML 4,38,41 2.20% MPI Dec-13 49 11 6 4.54 2.85 1,706 29
Blakeney OML 4,38,41 1.80% MPI Jul-13 39 9 5 4.43 2.79 1,396 28
Mercuria OML 4,38,42 2.70% MPI Jul-13 59 13 8 4.47 2.81 2,094 28
Seplat OML 56 40% Pillar Oil Jun-13 60 10 15 6.00 2.40 800 75
Oando OML 60-63 Various ConocoPhillips Jun-14 1,650 211 484 7.82 2.37 43,000 38
Afren OML26 23% Various Jul-13 195 28 18 6.98 4.25 2,370 82
Afren OML26 5% CBO May-13 37 6 4 6.07 3.86 515 72
Shoreline OML30 45% Shell, Total, ENI Nov-12 850 515 265 1.65 1.09 15,750 54
ND Western OML34 45% Shell, Total, ENI Sep-12 600 115 485 5.22 1.00 29,250 21
Elcrest OML40 45% Shell, Total, ENI Sep-12 144 35 33 4.15 2.13
Neconde OML42 45% Shell, Total, ENI Dec-11 585 126 140 4.64 2.20 6,750 87
FHN OML26 45% Shell, Total, ENI Dec-11 148 18 112 8.05 1.13 2,700 55
Jacka OML 113 5% Providence Res Sep-11 16 11 1.45
Inergia Petroleum OML 11 20% Hardy Oil & Gas Sep-10 5 15 0.30
SEPLAT OML 4,38,41 45% Shell, Total, ENI Jul-10 340 76 268 4.47 0.99 3,384 100
Weighted average: 6.94 0.85 50
Weighted average onshore 4.05 1.54 40
Weighted average offshore 11.12 6.59 77
Source: Company data and CSL estimates
In terms of future activity we already know that Royal Dutch Shell is selling
four indigenous marginal producing fields, having completed selling eight
fields worth US$1.8bn since 2010. In the absence of 2P and 2C reserve
data from Shell we have arrived at our valuation estimates by appling an
US$ based EV/producing asset value ratios as shown above for onshore
producing assets. Other asset sales include Chevron’s assets and
Exxon/Total stakes in the Usan field in OML 138. Total had Sinopec lined
up to buy in 2012 but this deal was never completed. Transaction activity
is likely to remain high with over US$11bn and 2bnboe of assets up for
sale currently.
Oil & Gas Assets for Sale in Nigeria 2014

Gas (mmscfpd) Total Oil & Gas Estimated Value (US$m)
Asset Seller Estimated Reserves (mmboe) Oil (bpd) Mooted Bidder
(boepd)
Mart Resources, SunTrust, MidWestern
OML 18 Royal Dutch Shell 21,000 12 23,280 978
233
OML 29 Royal Dutch Shell 618 58,000 20 61,800 2,596 Aiteo, Tulaveras
OML 24 Royal Dutch Shell 265 25,000 8 26,520 1,114 Ocean Energy
Lekoil, Crestar, Greenacres, CCG/Signet
OML 25 Royal Dutch Shell 33,000 2 33,380 1,402
334 Petroleum, NDPC/SAPETRO, Essar
OML 52 Chevron 67 - - - 536 Seplat, FHN, SAPETRO, Brittania U, Dangote
OML 83 & 85 Chevron 250 - - - 1000 First E&P
OML 138 Exxon/TOTAL 227 2500 Glencore, Mercuria
Total 2137 11,269
Going forward the key driver for M&A activity apart from the oil price is, we
believe, the need for indigenous Nigerian oil companies to simply get
bigger and be able to leverage on economies of scale to lower their unit
costs of production. Many are still far too small with relatively high SGA
costs to the enterprise value calculated in debt or equity terms for public
or private companies. Larger oil companies have strong buying power with
Page 23
global oil service companies, whereas smaller oil companies have to

negotiate hard to get rig slots offshore and onshore. We see the creation
of three to four larger independent Nigerian indigenous listed players in
the next five years as a real possibility given the current pace of M&A we
are witnessing as well as the need to leverage economies of scale through
synergies operationally (proximity of field locations), and the desire to
create ‘gas hubs’ in Nigeria to service the needs of local power producers
that require large volumes delivered efficiently.
Oil Price Outlook

The steep descent of oil prices recently has served as a timely reminder
that markets and in particular commodity prices are subject to the ‘random
walk theory’ which argues that past performance is not a good indicator
for future direction. This makes it impossible for investors to make returns
above those present in the market without taking on some additional risk.
Brent Crude US$/bbl (2010 –YTD)
US$/bbl
130
120
110
100
90
80
70
60
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Source: Bloomberg
Although oil prices often react very strongly in the short term to small shifts
in supply and demand, they do have a tendency to eventually return to the
marginal cost of supply. Studies by economists De Bond & Thaler in 1985
seems to suggest that the market does tend to behave this way. The
phrase that ‘US$100/bbl is the new US$20/bb’l has dominated industry
thinking for the last three years, demonstrating how costs have moved in
line with prices.
The evidence we have suggests that the marginal cost of production has
been rising in recent years, and this should keep a floor under prices. For
example a deepwater oil project in West Africa in 2000 would cost
US$1bn, but today that same project costs nearly US$2.4bn. The drivers
behind this cost increase include manpower and steel costs, but also the
fact that exploration and development is increasingly from ultra deeper
water areas which have development costs of US$30-50/bbl before taxes
royalties and opex, with conventional oil now coming from remote areas
like the Arctic or Barents Sea, or unconventionals like shale in the US,
China and Poland.
Page 24
Global Marginal Costs (2007

US$/bbl), excl taxes
US$/bbl
100
90
80
Range of Marginal Full Cycle Costs
70
60
50
40
30
20
10
0
Source: The Oil Drum
New project decisions are made on the basis of expected rate of return
over the life of the project, with oil prices but one (albeit a very important
one) of many factors. Hence, producer companies must forecast, either
implicitly or explicitly, oil prices in these investment decisions.
The price point at which net returns turn positive (a positive NPV) is by
definition known as the breakeven price. For projects already in operation,
development costs may already be covered such that marginal costs are
the key consideration. In addition, there is the time factor to consider. How
long can a project sustain unprofitability before a decision is made to shut
it off? This is also affected by expectations of future prices, in other words,
whether prices are expected to rebound sufficiently within a feasible time
in order to restore profitability.
In 2008Ǧ09, when prices collapsed due to the global recession, capital

expenditures on Canadian oil sands, for example, fell from US$21 billion
in 2008 to $14 billion in 2009, a 33% decline. With benchmark Brent at
slightly below $90/bbl, and acknowledging that many crude grades receive
a lower price because of quality issues and/or being stranded in North
America because of infrastructure and regulatory issues, how much of
these types of production need an average price in excess $80/bbl
(nominal Brent in a given time interval) in order to break even?
Based on 2007 data the range of marginal full cycle costs was estimated
to be between US$70-80/bbl, with about 1mmbbls above US$80/bbl,
according to recently published estimates by the IEA. These include
Anthabasca oil sands and certain shale and tight oil producers in North
and South America. This latter group includes Utica shale, and Anadarko
tight oil. The majority of US shale including Bakken, Eagleford,
Haynesville, and Marcellus has a marginal cost of around US$50-
US$60/bbl, with the application of multi stage fraccing increasing the
productivity per well with the number of stages and horizontal lengths
increasing from 4 stages across 500 metres to 16 stages over 1,600
metres. Rail costs, taxes and manpower costs however are increasing
development costs for shale producers despite these efficiencies.
Page 25
In our view, OPEC inactivity to address oversupply could see prices

trade in a US$80-90/bbl corridor for some time until OPEC decides to
cut production in early 2015.
Longer term (out to 2020) we concur with the IEA recent analysis in their
World Energy Outlook 2014 (published 13 Novermber 2014), that the key
risk to long terms supplies comes from the Middle East and in particular
Iraq’s ability to attract investment and increase production levels. The
geopolitical risk associated of the war against ISIS and the threat of this
spreading to other parts of the Middle East is a potent one.
World oil supply is forecast by the IEA to rise to 104mmbpd within 25

years, but will depend critically on investments in the Middle East. As tight
oil output in the US levels off, and non-OPEC supply falls back by 2020,
the Middle East becomes the major source of supply growth.
Oil Production Growth in US,

Canada, Brazil and Middle East
Source: IEA
On the demand side although demand has weakened in China and in

Europe (notably Germany) IMF Global GDP forecasts continue to show
real growth of 3.3% in 2015 vs 3.2% in 2014 and 3.8% in 2016. The
correlation between the rate of global demand growth and global GDP
growth is relatively high, and shows that even in the absence of economic
growth, demand growth for oil of just under 1% could still be achieved.
Page 26
Global GDP Growth vs Global Oil

Demand Growth (1980 -2015E)
4%
3%
2%
Global GDP Growth
1% R² = 0.4757
0%
0% 1% 2% 3% 4% 5% 6%
-1%
-2%
-3%
-4%
% Change in global demand
Source: IMF, BP Statistical Review of World Energy
Current IMF forecasts show that oil demand growth of 0.7% in 2014 and
1.2% in 2015 is still possible despite the IEA decreasing their 2014
estimates by 200kboepd recently. This effect combined with the
withdrawal 1mmbpd of supply should see prices rebound in 2015,
especially if OPEC cuts its current production levels from 30mmbpd by a
1-2mmbp. Nigeria’s oil industry is not immune to lower oil prices with the
IEA indicating recently that around 200kboepd onshore and shallow
offshore production has a breakeven of over US$80/bbl, and could
therefore be shut in temporarily if oil prices stayed at or below that level.
Longer term the demand picture is strong with demand growth of 37% by
2040, with consumption driven by Asia, the Middle East and Latin America.
By 2030, the IEA expects China to overtake the US as the world's largest
consumer of oil.
Primary Energy Demand by fuel type

and region (2012 – 2040)
Source: IEA
Our long term forecast oil price is US$95/bbl for 2015 and US$90/bbl
in 2016. Beyond this we apply a 2.5% inflation assumption instead of a
forward curve approach since the latter is linked more to prevailing spot
prices and their volaltility rather than reflecting the fundamental supply
demand equilibrium.
Page 27
Nigeria Petroleum History,

Production and Consumption
Although the first exploration well is believed to have been drilled in 1908 Shell made the first discovery in
by the German-owned Nigeria Bitumen Company, the first oil discovery 1956
was not made until nearly half a century later. In 1956 the then sole
concessionaire Royal Dutch Shell (N/R) made its first discovery at Olobiri
in the Niger Delta. Oil production commenced just two years later at 5,000
b/d. The first offshore discovery was made in 1965 (the EA field) also by
Shell. During the 1960s other oil companies such as Elf (N/R), Mobil (N/R),
Agip (N/R) and Chevron (N/R) were attracted by the success of Shell.
In 1971 Nigeria joined OPEC and a year later oil production reached Joined OPEC in 1971
2mbpd and the national oil company NNPC was established in 1977. Oil
production fell to 1.24mbpd in 1983 as global oil demand slumped after
the second oil price hike in 1979 and the subsequent global economic
downturn. Production recovered to 2mm b/d in 1996 and has stabilised at
between 2mm b/d and 2.4mm b/d. Lack of re-investment in the 1990s
when the oil price was $20/bbl or lower and civil disturbances in and
around the Niger Delta region combined to limit production growth.
However an amnesty and a ceasefire by a key guerrilla group (MEND) has

led to much improved security in the Niger Delta region in recent years.
Problems still persist in the region, notably so-called bunkering which is
the theft of oil by tapping into pipeline infrastructure. Estimates suggest
around 180kbpd is lost to illegal bunkering. So far this year Nigerian crude
oil production has continued to fall below 2mbpd with OPEC and IEA
reported numbers suggesting production hovering around 1.9mbpd
currently.
Nigerian oil production (1965 – 3Q 2014)

000's bpd
3000
2500
2000
1500
1000
500
0
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
EIA OPEC
Source: EIA, OPEC
Nigeria has an ambitious target of achieving 4mm b/d of oil production in

2020 (a previous Government had the same volume target but the year Ambitious, but techncially achievable
was 2010). From a geologic standpoint the target is achievable since if we goal of 4m b/d oil production in 2020
if we think of the USA producing over 10mm b/d from a slightly higher
reserves base of 42bn barrels versus Nigeria’s estimated 37bn barrels this
Page 28
shows the potential to monetise more barrels. Perhaps an even better

comparison is with Russia producing 10.7mm b/d from 93bn barrels of oil
reserves, which implies a reserves to production ratio (R/P) of less than
24 years. Were Nigeria able to lift oil production to levels comparable with
Russia, then Nigeria would be producing 4mbpd based on the same R/P
ratio. Key hurdles in Nigeria to meeting such production levels include
access to funds, a robust infrastructure, civil disturbances and an overly
bureaucratic state oil company.
Nigerian oil reserves

mmboe
40
35
30
25
20
15
10
5
0
Source: EIA
An even greater opportunity exists in Nigeria’s gas resouces which are

estimated to contain 179Tcf proven reserves according to BP’s Statistical
Review of World Energy 2014. Nigeria is the ninth largest natural gas
reserve holder in the world and the largest in Africa. Despite holding the
ninth position globally for proven natural gas reserves, Nigeria produced
about 1.2 Tcf of dry natural gas in 2012, ranking it as only the world's 25th
largest dry natural gas producer. Since 2000 a large gap between
production and consumption has emerged with gas being exported
through LNG mainly.
Nigeria established a Gas Master Plan in 2008 that aimed to reduce gas
flaring and to help monetise gas resources for greater domestic use and
to export regionally and internationally. Draft proposals of the PIB also
include these goals. There are a number of recently developed and
upcoming natural gas projects that are focused on monetising natural gas
that is currently flared.
Dry natural gas production grew for most of the past decade until Shell
declared a force majeure on gas supplies to the Soku gas-gathering and
condensate plant in November 2008. Shell shut down the plant to repair
damages to a pipeline connected to the Soku plant that was sabotaged by
local groups siphoning condensate. The Soku plant provides a substantial
amount of feed gas to Nigeria's sole LNG facility. As a result, its closure
led to a reduction in Nigeria's natural gas production, particularly from
Shell's fields in the Niger Delta, and a decline in LNG exports in 2008 and
2009.
Natural gas production gradually grew after 2009, and it reached its
highest level of 1.2 Tcf in 2012. Typically, most of Nigeria's dry natural gas
Page 29
production is exported in the form of LNG, with smaller volumes exported

regionally via the West African Gas Pipeline. Nigeria consumed 224 Bcf of
dry natural gas in 2012, less than 20% of its total production.
Central to the development of gas has been the establishment of an

effective gas pricing environment which is sufficiently high to cover costs
(development and operating) whilst low enough to satisfy indigenous
demand which is mainly associated with the power sector. We know from
Seplat that the DSO price achieved in 2014 was US$2.5/mcf and that once
companies have satisfied the DSO they can sell their gas to local
companies like power or manufacturing industries at higher prices in
excess of US$2.5/mcf.
Nigerian gas production (1980-2012)
bcf
1400
1200
1000
800
600
400
200
Production Consumption
Source: EIA
Nigeria’s power sector is suffering from a gross demand-supply imbalance

with a population of 170 million having an installed generation capacity of
10,400MW, of which 4,300MW is available for generation. This compares
to other countries like South Africa with 31,880MW of capacity for a
population of 52 million. In order to satisfy demand, Nigeria would require
170GW of capacity or 1,000MW per 1 million population. Based on UN
population growth estimates by 2020 Nigeria population could reach 221m
implying an even higher capacity requirement of 221GW. Recent
Independent Power Plant (IPP) power projects in Nigeria can be used as
a proxy to estimate the required capex to achieve this. Azura Power
Holdings (N/R) are building a gas fired IPP in Nigeria with a capacity of
450MW, costing US$750m to build (Seplat have agreed to supply this
plant with their gas). This suggests US$1.67m/MW total plant and
construction costs. According to the EIA, to build a 620MW gas fired
(conventional) plant in the US based on 2012 estimates, would cost
US$1.47m/MW. The variation in costs depends on plant location as well
as proximity to gas supply. We have assumed a plant cost of
US$1.5m/MW in Nigeria, which implies US$331bn will be required to
satisfy projected 2020 demand. In our publication on the Nigerian Power
Sector (see Nigerian Power Sector ‘Value Investment Opportunity or
Value Trap’ 5 August 2014) we conclude that a more realistic target for
Nigeria is to reach 40-45GW within 10 years implying outlays of US$60-
67.5bn. For Nigeria’s gas industry this therefore represents a huge
opportunity to supply gas at competitive prices and to diversify and expand
base load capacity.
Page 30
Another possible route is to sell gas in the form of liquified natural gas
(LNG). Nigeria has approximately six LNG trains producing about 22mtpa
or about 10% of total global LNG consumption. Expansion plans beyond
this include a seventh train, Brass and OKLNG projects. A slow down in
investment in this sector has occurred with the final investment decision
(FID) over Brass LNG being delayed due to the mounting costs associated
with the project which stood at an estimated US$15bn at the end of 2013.
Chevron pulled out from this project (17% stake) earlier this year as well
as OK LNG.
Export Routes for Nigerian Crude

According to monthly statistics published by the Nigerian National
Petroleum Company (NNPC), India is now the largest importerr of Nigerian
crude achieving this position as early as September 2013. India imported
12.4mmbbls, some 6.7mmbbls higher than the US at 5.7mmbbls during
this period, and maintained its leading import position compared to the US
and the Netherlands at 11.3mmbbls.
Indian and US imports of Nigerian Crude (April 2013 – January 2014
mmbbls
16
14
12
10
8
6
4
2
0
US India
Source: NNPC
There appear to be several factors driving this change. Firstly the US has
become more self sufficient and less import dependent as a result of shale
oil and gas production. The US imported 7.7mmbpd in 2013, yet produced
10mmbpd through shale activities. Secondly, India has doubled its refinery
capacity since 2003 from 2.3mbpd to 4.3mbpd, in line with GDP growth
rates of 4-5% per annum during the same period. Despite this growth India
still has one of the lowest per capital consumption rates for oil in the world
at 1.1 barrels per person per year versus Europe at 12.0 barrels per year,
and the US at 22.3 barrels per year. This implies that there is still potential
for growth despite India’s efforts to expand its product supply base.
Thirdly, the current worsening position in Iraq with the spectre of civil war
between Shia and Sunni Muslims is prompting the Indian government to
seek alternative sources of imported crude to ensure security of supplies.
The Middle East is the largest importer of crudes into India, with Iraq
accounting for around 15% of this in 2013. India is Iraq’s second largest
customer after Europe exporting 400kbpd of crude through Basra.
Page 31
India has the advantage as a crude buyer, that it can source a basket of
crudes ranging across a spectrum from heavy, light, sweet, or sour grades
since its refinery base has one highest Nelsons refinery complexities in
the world. India also boasts having one of the largest refineries in the world
at Jamnagar spread over 7,500 acres (just over 30 kilometers square)
processing 1.24mmbpd through fifty processing units.
Page 32
Indigenisation continues
The indigenisation process began just over 10 years ago and is essentially
the transfer of assets from international hands to local ownership. Indigenisation process began 10
Indigenous E&P companies are defined as having 55% or more Nigerian years ago – progess may be picking
ownership. The indigenous companies are in a privileged position with up after a slow start
regard to taxation (lower royalty rates and lower Petroleum Profits Tax for
the first 5 years of a new field’s life) and access to new licences in a
licencing round. Furthermore, it would appear that when an IOC decides
to sell assets (Shell, ConocoPhillips) the Government encourages the IOC
to sell onshore assets to at least one of the indigenous players.
The indigenous companies have the broad support of the Government and
typically have a better relationship with the host communities than their
larger IOC peers with many of them contributing part of their pre tax profits
to local development projects. As such the indigenous companies are well-
positioned to grow investment and production in the onshore Niger Delta.
Ownership of Resources in Nigeria, 2011
Indigenous Major IOC International NOC

Other international Domestic NOC
3%
43%
48%
5%
1%
Source: IHS Herold
Although the sale of OML 30 to Shoreline and OML 34 to ND Western will

Indigenous players actively looking
have increased the share of resources under control of indigenous
to grow and embrace new
companies, this 2011 pie chart shows the indigenous companies to be opportunities
dwarfed by both NNPC (the Domestic NOC) and the Major IOCs.
For the Government to meet its ambitious 2020 oil production target more
resources need to find their way into the hands of the indigenous
companies (and the Government needs to encourage IOCs into
deepwater). Further licencing rounds and encouragement to other Major
IOCs to follow the example of Shell and sell down their assets should be
priorities for Abuja, in our opinion.
In summary, as a group the indigenous E&P companies are very well

Indigenous companies well placed to
placed to grow volumes and cash flow. They are supported by the grow volumes and cash flow
Government (though more support would always be nice), most of the yet-
to-find oil is onshore in the Niger delta which is their speciality and the cost
structures of the Major IOCs suggest further asset sales to the indigenous
companies are highly likely.
Page 33
The advantages of being an

indigenous E&P company
The classification of an indigenous E&P company is enshrined in law (The

Nigeria Oil and Gas Industry Content Development Act 2010). The key
consideration is that not less than 55% of the ownership of that company
should be Nigerian to be classified as an indigenous company.
There are three key advantages of an indigenous company (say Niger

Delta Exploration and Production) over an E&P company (say Afren).
1. Indigenous companies have a preferential right to participate in Indigenous companies are helped
marginal field licencing rounds. There has only been one such through preferential access to assets
and favourable tax treatment
round so far, though another is expected in the near future. Some
estimate that Nigeria’s marginal fields cumulatively contain a
STOIIP of 2.3bn bbls.
2. Indigenous firms receive valuable tax breaks. Instead of paying a
flat 20% royalty tax on oil sales revenue (7% royalty tax on natural
gas sales revenue), an indigenous company pays royalty at a
sliding-scale starting at 2.5% for oil production up to 5,000 b/d,
7.5% for 5-10,000 b/d, 12.5% for 10-15,000 b/d and 18.5% for all
oil volumes above 15,000 b/d. Furthermore, there is a five-year
initial partial tax-holiday from Petroleum Profits Tax. PPT is
normally levied at 85% of field pre-tax profits. For an indigenous
company there is a lower rate of 65.75% applicable for the first
five years of production and then from year 6 onwards PPT
reverts to the normal 85%.
3. Indigenious firms may be allowed to obtain the operatorship of
marginal fields in certain circumstances subject to government
approval
Page 34
Why Nigeria is attractive
Major Hydrocarbon Resource Holder

Nigeria very comfortably falls into the category of being a Major
Remaining oil reserves of 37bn bbls
Hydrocarbon Resource Holder. Remaining reserves are assessed at 37bn
with possibly another 40bn bbls of
bbls of oil and 187tcf (32bn boe) of gas though it is believed that there
resources
could be a further 40bn bbls of oil resources and over 300tcf of additional
gas resources.
Based on oil reserves, Nigeria is second in Africa behind Libya and first in
terms of gas reserves ahead of Algeria. Daily oil production of 2.4mm b/d
places Nigeria comfortably first in Africa ahead of Angola, Algeria and
Libya. However, in terms of gas production (most of which is exported)
Nigeria only ranks in third place behind Algeria and Egypt.
In global terms Nigeria currently ranks tenth for oil reserves, ninth for oil
production and gas reserves and a rather more lowly twentyfifth for gas
production.
Well below-average exploration risk

Nigeria has a substantial inventory of discovered oil fields that have yet to Minimal exploration risk – 4 out of 5
be developed. More than 1,000 fields are believed to have been success rate onshore
discovered in the country although fewer than 350 of those fields have
been developed.
Many of the undeveloped discoveries were made in the 1970s and 1980s
when oil prices were lower and licence holders were required to drill their
acreage in order to retain the block. Higher oil prices in the last ten years
have improved field economics although civil unrest in parts of Niger Delta
area has held back development options.
Exploration success rates have been high in Nigeria, particularly in the

Delta region. Accurate data for the whole country or just the onshore is not
available but operators we have spoken to report drilling success rates
above 80%, with one operator achieving more than 90%. It should also be
remembered that much of the historic drilling success was achieved before
the advent of 3D seismic which is credited with lifting the global drilling
success rate over the last 15 years.
In the deepwater offshore exploration success rates are around 60%

which is high relative to frontier exploration areas globally where success
rates are 10% and sometimes as low as 5%.
No resource nationalism/asset grab in recent years

Since the oil price began to rise around ten years ago a number of Nigeria has not resorted to resource
Governments of hydrocarbon-producing nations have played the resource nationalism
nationalism card either by directly nationalising privately owned assets as
was the case in Argentina, Bolivia and Venezuela or by “encouraging”
existing private owners of assets to sell interests to the state-owned
company. Russia and Kazakhstan are examples of the latter. There has
been no resource nationalism moves within Nigeria in recent years
however Nigeria did nationalise BP’s [BP/ LN, NR] assets in 1979 and
endowed NNPC with those businesses.
Page 35
Longstanding presence of foreign oil companies in

Foreign oil companies have been
Nigeria here a long time
International oil companies have been operating in Nigeria for more than
50 years. This longstanding presence has allowed both Nigeria and the
IOCs to grow to understand each other. This is not to say the two sides
always have a harmonious relationship however we believe the long
tenure of IOCs in Nigeria has helped avoid some of the resource
nationalism problems seen in countries such as Argentina, Kazakhstan,
Russia and Venezuela where IOCs have only been admitted (or re-
admitted in the case of Venezuela) within the last 20 years.
Even if they do not exactly see eye-to-eye, at least the Government and
the oil industry understand each other very well.
Access
The worlds’ remaining recoverable reserves of conventional crude oil are
assessed to be roughly 1.4trn barrels, of which approximately 37% are
effectively off-limits to all but the respective NOC. Saudi Arabia, Mexico
and Kuwait are all closed to foreign investment and in practice Iran can
also be added to this list. Countries such as Russia, Libya, Venezuela and
Iraq can all be difficult places in which to do business and the inward
investment that does occur has largely been limited to the Super Majors Open for business – Nigeria
or other very large NOCs. Adding this latter group of “difficult to access” represents 8% of the available and
countries to the former closed nations takes the percentage of remaining accessible world oil reserves
conventional crude oil reserves that are impossible/difficult to access up
to just over 66%.
Expressed another way, Nigeria’s estimated 37bn barrels of remaining

crude oil reserves represent 8% of the available remaining world oil
reserves that are reasonably accessible to oil & gas companies of all sizes.
Access, and at a reasonable price

Not only is Nigeria fairly accessible to almost all sizes of oil & gas M&A transaction values roughly one-
companies but valuations are reasonable too. The auction by Shell of third the global average
Niger Delta onshore blocks has resulted in an average of $4.73/bbl being
paid for 2P oil reserves and just $1.42/boe for 2P+2C oil & gas reserves.
The 2P reserve valuation is approximately one third of the current global
average value as compiled by GlobalData.
Historic Shell auction valuations pre 2014

2P oil 2P+2C oil & gas Purchase price 2P oil 2P+2C oil & gas
mmbbls mmboe U$m U$/bbl U$/boe
OMLs 4, 38 & 41 76 344 340 4.47 0.99
OML 26 18 130 148 8.22 1.14
OML 42 126 266 585 4.64 2.20
OML 30 515 780 850 1.65 1.09
OML 34 115 600 600 5.22 1.00
OML 40 35 68 144 4.16 2.12
Average 4.73 1.42

Source: Company data
According to our estimates these 2P and 2C US$/bbl multiples have not

changed markedly with further planned asset sales by Chevron, Exxon,
Royal Dutch Shell and Total in 2014/15 generating significant interest
Page 36
amongst existing indigenious players as well as possible new entrants with

new and additional sources of capital. Over US$11bn and 2bnboe are
currently up for sale in Nigeria by the IOC’s.
Planned Divestments by IOC’s in Nigeria

Gas (mmscfpd) Total Oil & Gas Estimated Value (US$m)
Asset Seller Estimated Reserves (mmboe) Oil (bpd) Mooted Bidder
(boepd)
Mart Resources, SunTrust, MidWestern
OML 18 Royal Dutch Shell 21,000 12 23,280 978
233
OML 29 Royal Dutch Shell 618 58,000 20 61,800 2,596 Aiteo, Tulaveras
OML 24 Royal Dutch Shell 265 25,000 8 26,520 1,114 Ocean Energy
Lekoil, Crestar, Greenacres, CCG/Signet
OML 25 Royal Dutch Shell 33,000 2 33,380 1,402
334 Petroleum, NDPC/SAPETRO, Essar
OML 83 & 85 Chevron 250 - - - 1000 First E&P
OML 138 Exxon/TOTAL 227 2500 Glencore, Mercuria
Total 2137 11,269
High quality crude oil

Nigeria has five principal blends of crude oil which, with the exception of
Forcados, are amongst the highest quality specification in the world.
Nigeria’s crude oil is Light (relatively high API), Sweet (relatively low
sulphur) and also has a low acid content. As such, Nigerian crude oils
tend to trade a premium price to Brent blend of anything between $1-5/bbl.
The crude is ideal for conversion to gasoline and middle distillates (diesel,
jet and kerosene) leading to consistently good demand within the Atlantic
basin refining community.
Nigeria crude oil specifications

API Sulphur TAN
degrees % Mg
Bonny Light 36.1 0.20 0.28
Qua Iboe 35.3 0.10 0.40
Brass River 38.4 0.13 0.30
Escravos 33.7 0.17 0.61
Forcados 30.3 0.18 0.57
Brent 37.8 0.37 0.07
Source: Petroleum Review and Platts
Note: Total Acid Number is an indicator of acid content, >1mg is considered a high number
Page 37
Key risks
In addition to the standard oil & gas industry risks which include reserves,
delays, commodity pricing, changes to taxation etc., Nigeria presents a
number of other risks which are common to certain emerging nations and
a couple of risks which are reasonably unique to Nigeria.
The threat of Civil Disturbance is high in Nigeria and in the Niger Delta Civil disturbance is a major risk in the
region in particular. The area is impoverished and absent the oil & gas Niger Delta
industry, has very few other sources of employment and economic
progress. Therefore, the oil & gas industry is a natural target. There are a
number of militant groups in the region some of which are fighting for
different objectives. The most serious currently being Boko Haram which
has intensified its attacks in Nigeria since 2010 and has been linked to al
Qaeda in the Islamic Maghreb. Boko Haram promotes a version of Islam
which makes it forbidden for Muslims to take part in any political or social
activity associated with Western society. This includes voting in elections,
wearing shirts and trousers or receiving secular education. They have to
date mainly launched attacks in the Northern part of Nigeria which is
predominantly Muslim. In the south and Niger Delta region the security
has improved in the last three years with local indigenious Nigerian oil
companies designing better and more imaginative support programmes
for their local communities which have reduced attacks on facilties and
improved reliability.
Due to lack of investment and difficult operating conditions on the ground, Poor infrastructure
Nigeria and the Niger Delta region suffer from inadequate infrastructure.
The provision of electricity and transport networks are both poor. In the
case of the former a dilapidated national grid and insufficient generating
capacity have lead to significant reliance on diesel generators. It is
believed Nigeria is the largest single market in the world for portable diesel
operated generators. Transport infrastructure is also poor. This is
obviously partly a function of the difficult terrain found across the Niger
Delta region. Many oil producers have no real alternative to pipelines for
transporting production leading to unusually high numbers of stoppages
due to the need for routine pipeline repair or sabotage.
As with a number of other emerging nations the Rule of Law is perceived

to be weak in Nigeria which presents security issues for all companies
operating in the country. Criminal activity and corruption is widespread and
oil & gas companies are targets due to their affluence.
Finally it is worth mentioning two particular risks which are unique to

Nigeria and many of our coverage companies.
Losing indigenous company status could have negative implications.

The Nigeria Oil and Gas Industry Content Development Act of 2010 gives
priority to indigenous oil & gas companies in the award of licence areas.
With a new licencing round believed to be under consideration, retention
of indigenous company status could be important. The current requirement
is that Nigerians must own 55% of a company for it to be classified as
indigenous. It is not expected that the draft PIB will change the indigenous
status.
Although the Quality of relationship with a partner or partners is Working successfully with the NNPC
important in the oil & gas industry throughout the world, it is especially so appears to be a skill in itself
in Nigeria, in our view. For the indigenous companies, the partner will
Page 38
include NNPC, the state-owned company. To the disappointment of many

indigenous companies the NNPC assumed the Operatorship of the
Licence when the IOC sold, even though the IOC had previously been
Operator. NNPC is both overly bureaucratic and financially under-
resourced, implying a good working relationship with the state entity is
highly important.
Our key criteria for investment
In addition to Valuation, there are four other Key Criteria we use in

assessing an investment. These criteria are common to many other parts
of the world; however we have slightly adapted some to suit Nigeria and
its E&P companies.
1. Management & Partners are important ingredients of success Challenges are on the surface, not in
the world over. Given the complexity and bureaucracy of an the sub-surface
emerging nation, Management & Partners are probably more
important in Nigeria than would be the case in say Norway or the
USA. Given the relatively low exploration risk, the role of Head of
Exploration, which is often a key post in other firms, is of lesser
importance in Nigeria. A successful relationship with local and
national Governments and NNPC is important. With Partners we
look for financial strength and experience of operating in Nigeria
as two important factors. If the Partner is new to Nigeria then at
the very least they should have had experience of working in
similar developing countries.
2. Access to infrastructure is important in Nigeria as it is in most

other parts of the world. With first oil production in 1958, Nigeria
has a well-developed infrastructure of pipelines and terminals and
fortunately most of the major pipelines have spare capacity. If
access to a pipeline is not possible then there are more costly
alternatives available such as trucking or via barge if the field is in
the coastal area.
3. Financial strength/capability is another critical factor all over the Access to funding has improved over
world though we would argue more important in a country such as the last 10 years, but local market
Nigeria because it is harder to raise fresh funds and domestic remains relatively immature
capital markets are still relatively immature. However, the need for
large quantities of risk-exploration funds is relatively less in
Nigeria than most other African countries given the high
exploration success rate.
4. Deliverable strategy to yield shareholder value – we will try

and judge whether a project adds up and if it makes financial
sense. Are major contracts in place, is the NNPC onside, does the
entity possess technical and operating capabilities and will it have
a sustainable economic return are all key questions concerning a
project in Nigeria.
Page 39
Our valuation methodology

E&P companies are valued with reference to their producing assets,
portfolio of exploration opportunities plus an adjustment for corporate net
debt (or cash) and other corporate charges.
In line with standard practice we provide a Core NAV comprising of

producing and near-term producing assets adjusted for net debt/cash and
corporate charges. We risked these core assets to reflect any additional
operational risk that we can ascertain such as ongoing theft or pipeline
downtime into our risked estimates. To this Core NAV we add a risked
value for any assets in the Development & Appraisal stages, which is
normally around 60-70% and also add exploration to arrive at a Total
RENAV (risked exploration net asset value) or the company.
Resource Classification Framework
Resource Classification Framework
Source: SPE
Producing assets
We construct a model for each main producing asset based on broad DCF for producing or near-production
company guidance and our estimates of most likely operational assets
outcomes. We estimate production, operating and capital costs and
apply the current tax regime to arrive at annual cash flows for the field or
asset. We apply our standard discount rate to those cash flows (see Our
assumptions below) to generate a field DCF valuation.
Exploration assets
Our coverage companies tend to have very little value in their exploration
assets given that Nigeria has so many undeveloped discoveries. Where a
Page 40
company does have exploration assets we take company guidance for an

estimate of the potential gross resources and Chance of Success (CoS).
Chance of Success is high in Nigeria and particularly so in the Niger Delta
where Shell has historically enjoyed an exploration success rate in excess
of 80%. Finally we apply a per barrel value to the potential risked reserves
to produce a risked exploration value.
Our assumptions Oil price assumptions a bit below

consensus
Our oil price assumption used in our DCF models is US$100/bbl for 2014,
US$95/bbl for 2015 and a long term oil price assumption of US$90/bbl in
2016. Thereafter we inflate our 2016 oil price assumption (US$90/bbl) by
2.5% p.a. We are using Brent blend to enable us to easily compare our
price assumptions with consensus. All of the companies in our new
coverage universe earn a realisation that is superior to Brent blend
however we have not reflected this in our DCF valuations.
The gas prices that we use are provided to us by those companies and
reflect the gas price in their contracts which have been released .
Finally, we apply a discount factor of 12% (10% + 2%) to our field cash
We use a 12% discount factor
flow calculations. This figure is derived from the standard 10% discount
factor used by the global oil & gas industry plus a 2% premium to reflect
the inherently higher risks of operating in an emerging nation. We are
aware of others applying a higher discount factor of 15% but we judge that
a little too harsh given Nigeria’s good track record on resource nationalism,
settled institutions and longstanding presence of foreign oil companies
operating in the country.
Page 41
Part 2 – The companies
Page 42
BUY
(Price: 73p – Target: 141p)
Afren
Key data
Investment conclusion Year to December (US$m except EPS)
2013A 2014E 2015E 2016E

We reiterate our BUY recommendation and target price of 141p/share.
Our target price is based on an estimated NAV-derived takeout value. Sales 1,644 1,359 1,910 4036
Afren continues to trade at a substantial discount to its risked exploration
Net. Inc. 516 235 339 548
NAV value of 290p/share increasing the probability of M&A occurring.
Already, stake-building by potential interested parties has occurred. EPS 0.45 0.21 0.31 0.50
Operationally the company remains sound, with a strong financial P/E (x) 1.6 3.4 2.4 1.5
position and several development projects coming to fruition in Nigeria, Div Yield
combined with a substantial exploration portfolio spanning Africa and (%) 0 0 0 0
Kurdistan. Recently the company confirmed that production operations Mkt. cap.(US$m) 807
in Kurdistan had recommenced at the end of October 2014 adding
Free float 95%
another useful source of cashflows.
Bloomberg AFR LN
We do not see a risk of the company losing licences in Nigeria at this
Reuters AFRE.L
early stage of the internal investigation, however we see a higher risk of
sanctions and fines being imposed by regulatory authorities in the US
and UK. Any civil litigation risk appears low at this juncture since the Six month share price
company is still investigating alleged unauthorised payments to
directors. If unlawful behaviour is uncovered, however, we estimate that
any liability thereafter will be a function of shareholder losses which we
estimate are currently at US$1.8bn. This is the difference between the
share price 90 days after the 31 July 2014 when the company first
announced that internal investigations had commenced.
One possible route to realising value for shareholders would be to have

the company sold either through an agreed merger or takeover by a
public or private company. By having the company taken out at a slightly
higher value of 149p/share versus our NAV target price of 141p this
could protect any potential acquirer of the company for any future claims
brought forward, should unlawful behaviour be subsequently proven.
Importantly this could also realise some value for the underlying assets
from a shareholder perspective more readily than through any lengthy Contact information
litigation process, which increases company-specific risk and impacts
the valuation of the company further by applying an even greater London: +44 (0) 20 7220 1043
governance discount than is currently being applied by the market. We Lagos: +234 (0)1 448 5436
see the risk of litigation as low currently, with a strong prospect of M&A
Angus McPhail
occurring.
Guy Czartoryski (Head of Research)
Company overview
Afren is a large E&P company with a market capitalisation over £1bn, Temi Popoola (Lagos Sales)
2P reserves of 286mmboe, and 2P & 2C reserves and resources of
1,096mmboe. Estimated 2014 net production is targeted to be 32,000 -
36,000boepd.
The company has a strong focus in Nigeria and Kurdistan with a

significant exploration footprint in the Congo (Brazzaville), Côte d’Ivoire,
Ethiopia, Ghana, Kenya, Madagascar, the Seychelles, South Africa, and
Tanzania. Afren has increased its exploration portfolio in East Africa. Near
term exploration is centred on Ebok Deep, OML 115, Kenya (Blocks 1,
Page 43
L17/l18), and Côte d’Ivoire. Afren’s three producing fields at Okoro, Ebok
and OML 26 account for the majority of production across its asset base,
with Barda Rash in Kurdistan being shut in due to the challenging security
position in the country currently. Net production of 33,488boepd was
achieved in H1 2014, which is in line with the 2014 year end target.
Valuation
We have valued Afren using a NAV analysis incorporating a 12% discount
rate and a US$90/bbl oil price base from 2016 onwards. Our core NAV,
which only includes the value of producing assets (2P) in Nigeria and
Kurdistan, is 135p/share.
Afren NAV
12% NPV, US$90/bbl L-T Reserves WI¹ Unrisked Risked
Block Field/Prospect WI mmboe US$/boe US$m US$/share CoS² US$m £/share
Production
OML 26 Ogini & Isoko 45% 65 4.88 316 0.28 100% 316 0.17
OML 112 Okoro 50% 31 26.16 817 0.72 100% 817 0.43
OML 67 Ebok 50% 58 23.40 1357 1.19 100% 1357 0.72
Kurdistan Barda Rash 60% 114 6.86 782 0.69 100% 782 0.41
Less Net debt/cash -720 -0.38
Core NAV 268 12.21 3273 2.87 2553 1.35
Development & Appraisal

OML 67 Okwok 56% 29 11.00 319 0.28 50% 160 0.08
OML 113 Aje 17% 28 14.96 268 0.24 50% 134 0.07
CI-01 Kudu, Eland & Ibex 65% 24 5.00 120 0.11 50% 60 0.03
OML 26 Ogini & Isoko upside 45% 31 5.00 153 0.13 80% 122 0.06
Kurdistan Ain Sifni 20% 42 5.00 210 0.18 40% 84 0.04
OPL 310 40% 310 5.42 1679 1.47 50% 840 0.44
D & A NAV 463 5.94 2749 2.41 1399 0.74
Exploration
OML 67 Ebok Deep 50% 50 5.00 250 0.22 20% 50 0.03
OML 115 Ameena East 50% 65 10.00 650 0.57 20% 130 0.07
Tanzania Tanga 74% 963 5.00 4815 4.23 20% 963 0.51
Kenya Block 1 80% 2422 1.00 2422 2.13 10% 242 0.13
Kenya Blocks L17& L18 100% 2021 1.00 2021 1.77 10% 202 0.11
Expln NAV 5471 1.81 9908 8.70 1537 0.81
TOTAL Risked Exploration NAV (RENAV) 6202 2.57 15930 13.98 5489 2.90
Note: ¹ Gross recoverable resources ² Chance of Success
The total RENAV value of Afren is estimated to be £2.90/share. The

market currently appears to be only ascribing value for 2P producing
assets in Nigeria with a substantial governance discount being applied
given the ongoing uncertainty created by the internal investigation.
We have included the full value of the producing asset Barda Rash in
Kurdistan despite operations being shut down due to the security situation.
In our opinion the value of the asset has not changed with production set
to restart in 4Q 2014 now.
Our NAV waterfall shows significant potential from exploration drilling in

the next 12 months, with relatively low-risk opportunities in Ebok Deep and
Page 44
OML 115 (Ameena East) given the analogous geology to existing

producing and exploration wells completed to date in both areas. We have
not included the value of appraisal or exploration assets since they are
beyond our twelve month investment horizon.
Afren NAV Waterfall

£
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Producing Net debt/cash Core NAV Appraisal Exploration Total RENAV
Another and perhaps more efficient way of avoiding any potential litigation
liability arising from shareholder losses would be to have the company
taken over at a price of at least £148.88p/share quoted on 31 July 2014,
thus effectively mitigating any potential liability claim. As we have
previously discussed this is only relevant if unlawful actions are
subsequently proven. Shareholders in the US and UK would as a result
have a substantially weaker case to pursue the company for damages
since there would be no realised capital losses accrued.
The stock is currently below our estimated core NAV value of 135p/share.
Historic UK E&P transactions have averaged a premium of 32% with the
more recent Heritage Oil deal being struck at a 25% premium, this implies
a takeout price of 137.5p/share.
UK E&P Historic Takeout Premiums

Date Buyer Price US$(m) Offer Price (p) Pre offer closing price (p) Premium
Monument Oil & Gas 1999 LASMO 816 62 50 23%
LASMO 2000 ENI 3960 200 141 42%
Enterprise Oil 2002 Shell 3500 725 630 15%
Burren Energy 2007 ENI 2854 1230 1142 8%
Dana Petroleum 2010 KNOC 2460 1800 1132 59%
Nautical Petroleum 2012 Cairn 679 450 298 51%
Heritage Oil 2014 Energy Investments 1440 320 256 25%
Average Premium 32%
Another method of valuing Afren for M&A purposes is to use value for
historic transactions completed in Nigeria for onshore and offshore, since
this comprises the bulk of the value of the reserves on a 2P & 2C basis.
Our data shows that Afren has a core value of 108p/share for 2P assets
alone, based on 2P and 2C assets this rises to 141p/share, which is close
to our previously calculated value using historic premiums of 137p/share.
Page 45
Afren – NAV based on Existing M&A Values
Block Field/Prospect WI mmboe US$/boe (M&A multiple) CoS US$(m) £/share
Producing
OML 26 Ogini & Isoko 45% 65 4.05 100% 263 0.14
OML 112 Okoro 50% 31 11.12 100% 348 0.18
OML 67 Ebok 50% 58 4.05 100% 645 0.34
Barda Rash 60% 114 6.86 100% 782 0.41
Core NAV 268 2,037 1.08
Development & Appraisal

OML 67 Okwok 56% 29 6.59 50% 96 0.05
OML 113 Aje 17% 28 6.59 50% 92 0.05
CI-01 Kudu, Eland & Ibex 65% 24 1.54 50% 18 0.01
OML 26 Ogini & Isoko upside 45% 31 1.54 80% 38 0.02
Kurdistan Ain Sifni 20% 42 5 40% 84 0.04
OPL 310 40% 310 6.59 50% 1,020 0.54
Total 463 1,348 0.71
Total 2P & 2C Core Value 731 3,385 1.79
Net Debt -720 -0.38
Total 2P & 2C Core Value 2,665 1.41
Should unlawful activities subsequently be proven, then all of these

methodologies become an academic exercise since we know that
ultimately, to address any shareholder losses (which we have estimated
are US$697m), a takeout price of 149p/share or above is a pre-requisite
to negate any future claims made against the acquirer.
Already stake-building by one indigenious Nigerian oil company appears

to be occurring with South Atlantic Petroleum Company (SAPETRO)
taking an 3.14% stake, which has subsequently been increased to 4.17%
on 3 October 2014.
Any private or public company acquiring Afren would almost certainly

require a comprehensive indemnity agreement within a takeover
document agreement to protect them from any potential claims or potential
liabilities related to previous alleged unauthorised activities by Directors.
Page 46
Afren Assets
Nigeria
Afren has a significant producing asset base in Nigeria (offshore and

onshore), with further upside from the development of assets at Ebok.
Okoro Setu, OML 26, OPL 310, OML 113 (Aje field), Okwok, and OML
115.
Afren’s Nigerian Assets – Onshore and Offshore

Gross Production Net production
WI, % Local Partner Work Programme Reserves (mmboe) (1H'14) (1H'14)
Ebok 100%/50%a Oriental Production and development 103.8 9 (2P) 29300 23337
Okoro Setu 50%b Amni Production and development
55.4 (2P) 16270 8135
OML 26 45%c FHN Production, Development, Appraisal and Exploration
615 (unrisked resources) 3764 1694
d
OPL 310 40% Optimum Petroleum Development Ltd Seismic interpretation and appraisal drilling 774-1180 (P50-P10) - -
OML 113 16.875%e FHN Development, Appraisal and Exploration
167 (2C) - -
Okwok 70%/56%f Oriental Development drilling 46.6 (2C) - -
Addax Petroleum (Nigeria Offshore)
OML 115 100%/50%g Oriental Exploration drilling 205.5 (prospective) - -

Total 49334 33166
Source: CSL Estimates, Afren, a)- working interest pre/post cost recovery, b) working interest post cost recovery, c - held through FHN,a subsidiary of Afren
plc, d - 40% economic interest (following completion of farm out and subject to Nigerian Ministerial Consent), e - Held through FHN, a subsidiary of Afren plc, post cost
recovery economic interest, f – 70% pre cost recovery effective working interest 56% post cost recovery effective working interest (subject to gross volumes lifted).
Once hurdle point is achieved, Afren effective working interest becomes 35%. Hurdle point is achieved when post-royalty revenue lifted by the parties outside of any
cost recovery period is greater than US$1.2 billion, g - 100% pre cost recovery effective working interest; 50% post cost recovery effective working interest.
Ebok
Ebok is an undeveloped oil field located in OML 67, 50 km offshore in 135ft

of water. Ebok was discovered by the ExxonMobil / NNPC JV in 1968, with
two subsequent appraisal wells being drilled in 1970. Ebok is also located
close to several producing ExxonMobil/NNPC JV fields and 55km south-
east of ExxonMobil’s onshore Qua Iboe Terminal. The initially estimated
mean STOIIP at Ebok (pre 2008/2009 appraisal drilling) was 118 mmbbls
of which 25 mmbbls was estimated as recoverable by Afren.
Ebok Field
Source: Afren
Page 47
Ebok and Okwok FPSO Type Development Plan
Source: Afren
The Ebok Field (Ebok) was awarded to Oriental Energy (operator) in May
2007 by the ExxonMobil/Nigerian National Petroleum Corporation (NNPC)
Joint Venture. The farm-out was structured such that the field benefits from
the Pioneer tax shield which applies from mid 2011 until mid 2016.
In 2013, the Ebok field produced a total of 34,910 boepd, with production
falling back to 29,300 in 1H’14. Following the discovery in 2012, the
Partners successfully drilled three production wells and one water injector
well into the Ebok North Fault Block (NFB) in 2013. These producing wells
have been tied back to the existing West Fault Block (WFB) infrastructure.
Afren plans to use the Ebok field as a central hub facility broader
development in the surrounding Ebok structure across Ebok/Okwok/OML
115, where tie backs could be built to enhance future production.
Okoro Setu
The Okoro and Setu Fields (Okoro Setu) are located in OML 112 in shallow
water offshore Nigeria, and were originally awarded to Amni (operator).
The well encountered oil in two zones in the Agbada Formation. Okoro-2
well was drilled in 1974 at the eastern extension of the field and was dry.
Page 48
Okoro Setu
Source: Afren
Okoro Setu produced 16,270boepd in 1H’14 and has 2P reserves of

55.4mmboe. Production operations continue to run smoothly at the Okoro
field with little downtime The early development well, Okoro 14 continues
to produce at stabilised rates of approximately 4,700 boepd. Since the
start of production in 2008, the Okoro field has continued to perform ahead
of expectations, delivering aggregate gross production volumes to end
December 2013 of.32.4 mmbbls, significantly above the original 2P
scenario of 26.2mmbbls.
The field development includes a Well Head Platform (WHP) which is set
to be a conventional four-pile platform. The WHP is to have 12 well slots
capable of holding dual trees, which would enable the platform to host up
to 24 producing wells. A further Field Development platform is to be
located close to the existing Okoro Main wellhead platform and the two will
be linked by a bridge. Afren along with partners have decided to install a
new Mobile Offshore Production Unit (MOPU), as close as possible to the
Okoro Further Field Development WHP, linked by a bridge. The Okoro
Further Field development is expected to be sanctioned in Q3 2014, with
the wellhead platform being installed in Q2 2015 with development drilling
commencing shortly thereafter.
Okoro FSO Type Development Plan
Source: Afren
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Nigeria Oil & Gas

Nigeria | Energy | Oil & Gas 17 November 2014

The Long Journey

angus.mcphail@fcmbuk.com , +44 20 7220 1043

Niger Delta Petroleum Geology 8

Oil Price Outlook 24

Nigerian Petroleum History, Production and

Why Nigeria is attractive 35

Our Key Criteria for investment 39

Our valuation methodology 40

Part 2 – The Companies

In “The Long Journey” we are initiating coverage on nine Nigerian

· We see a switch away from further Pioneer tax allowances on

· M&A will be a feature in 2015 with E&Ps applying the philospohy

Share price performance of our Nigerian E&P coverage companies has

Nigeria E&P company valuations plus selected regional comparables

2P reserves (mmboe) 268 18.177 24 0 16.9 447 427 225

EV/Production 2014e 163 3 257 - 235 135 160 148 157

View BUY BUY BUY BUY BUY HOLD HOLD BUY

Nigeria is arguably one of the most geologically attractive hydrocarbon

We would argue that the upside for Nigeria is substantial. Production

Niger Delta Petroleum Geology

Source: TJA Reijers

Niger Delta hydrocarbon province

There are three main stratigraphic intervals recognised:

1. Marine pro-delta mudstones and turbidites (Akata Formation)

Principal sedimentary facies in the Niger Delta region

The Niger Delta is a self-contained petroleum system with source rocks

Reservoir presence is usually not an issue in the Niger Delta’s Middle

Principal structural zones in the Niger Delta region

Known trap types comprise structural, stratigraphic and combination traps.

Structural complexity increases into the deeper water due to increasing

Niger-Benue system is deposited and retained on the delta top. Deep-

Niger Delta – Field Sizes

Field size distribution in the Niger Delta region

Source: Richmond Energy Partners

The four deep-water developments to date are in the 500-1000mmbbls

Niger Delta – Future potential

A high proportion of current interest and activity is focused on the

In 2005 Total (N/R) published an estimate for the future yet to be

Estimated Yet to Find in Nigeria

Niger Delta Stucture and play sub division

Capex Offshore Nigeria Deepwater Projects (2005 to date)

In the deepwater since Shell first commenced production at the giant

Capex Offshore Nigeria Deepwater Projects (2005 to date)

Total production from existing deepwater projects is around 1.1mmbpd,

Split of Nigerian Oil production by source (1995 -2025E)

If we examine analysis by Chevron, exploration in West Africa excluding

Post Jubilee Deepwater well discoveries by size

Source: Chevron (Oil Council Presentation Paris, June 2014)

Nigeria’s exploration success rate in the deepwater is roughly in line with

Despite the uncertainties of the PIB there is evidence of IOCs allocating

in April, stipulates that a significant amount of the fabrication of the vessels

Marginal Field Capex

The definition of a marginal field is interchangeable and is dependent on

Generally, a marginal field is defined as one in which economics do not

In Nigeria the government classifies marginal fields using several criteria,